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Trading Stock Options: Basic Option Trading Strategies and How to Use Them to Profit in Any Market [Paperback]

admin — Tue, 22 Jun 2010 13:47:13 +0000

Many traders and investors dismiss stock options as either too complex or too risky. But did you know that options can be easily understood and the risk easily managed? This book will show you the basics of stock options in easy to understand terminology. You will be able to read option quotes with ease, get an option enabled trading account, and trade basic option strategies in no time. In Trading Stock Options, experienced option trader Brian Burns explains the basics of stock options and shows you how to trade the most successful option strategies. As you begin your journey on the option path, you’ll have the luxury of real-life trade examples to show you the way. The diagrams and charts help turn the complex world of options into easy to visualize and simple to understand strategies that even the most novice of traders can utilize. Trading Stock Options will show you how you can use options to: * Get paid to buy and sell your favorite stock * Purchase st (more…)

Forex Options Trading – What is a Forex Call and Put Option?

admin — Fri, 22 Jan 2010 21:59:18 +0000

What is a Forex Call Option?

A forex option gives you the right but not the obligation to buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you think that the market is going to go up then you would buy a call option. Likewise, if you think that the market is heading down, you would buy a put option. The seller (or “writer”) of the forex call option is obligated to sell the currency pair should the buyer so decide. The buyer of the call option pays a fee (called a premium) for this right.

The buyer of a forex call option wants the price of the chosen currency pair to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price. Call options are most profitable for the buyer when the price of the chosen currency pair has moved up past the strike price greatly. When the price of the chosen currency pair surpasses the strike price at the time of expiration, the option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the option is said to be “at the money”. When the price of the chosen currency pair goes under the strike price at the time of expiration, the option is said to be “out of the money”.

However, to be truly profitable, the gains resulting from the upward movement must also cover the cost of buying the forex call option (premium paid). For example, if the cost (premium) of buying a call option expiry in 1 week’s time is 120 pips then the chosen currency pair must move upwards more than 120 pips past the strike price. If it rises 300 pips above the strike price by expiration your profit would be (300 pips – 120 pips) 180 pips!

What is a Forex Put Options?

A forex put option gives you the right but not the obligation buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you feel that the market is going to go down greatly then you would buy a put option. Likewise, if you think that the market is trending up, you would then buy a call option. The buyer of the put option pays a fee (called a premium) for this right as the buyer expects the price of the chosen currency pair to drop in the future while the seller expects that it will not.

Put options can only make profits for the buyer if the price of the chosen currency pair has moved down past the strike price greatly. When the price of the chosen currency pair falls past the strike price at the time of expiration, the put option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the put option is said to be “at the money”. When the price of the chosen currency pair goes above the strike price at the time of expiration, the put option is said to be “out of the money”.

Please note that the gains resulting from the downward movement must also cover the cost of buying the forex put option (premium paid) to be profitable. For example, if the cost (premium) of buying a put option expiring in 1 week’s time is 135 pips then the chosen currency pair must move downwards more than 135 pips past the strike price. If it falls 250 pips below the strike price by expiration your profit would be (250 pips – 135 pips) 115 pips!

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.

Forex Options Trading – How Forex Options are Calculated (part 1 of 2)

admin — Fri, 22 Jan 2010 09:11:05 +0000

Forex options are calculated with ‘Greeks’. A basic explanation of these ‘Greeks’ will help you understand how and why the forex options move and behave in a certain way. An option is a derivative and how it’s value is derived is from a formula that combines these Greeks together. The Greeks are how these options respond to various factors such as price movement, time decay, volatility, and interest rates.

There are 5 Greeks involved and we share go through them one by one.

Delta: The speed of the option’s price gain or loss against the gain or loss of the ‘mother’ or underlying asset price is known as the Delta. The Delta is a figure that shows us how fast or slow the option will move relative to its ‘mother’ or underlying asset. A Delta of 1 means the option price is moving at the same speed and direction as the ‘mother’ or underlying asset. A Delta of -1 means the option price is moving in the opposite direction for every point the ‘mother’ or underlying asset moves.

The probability of an option expiring in-the-money is also expressed in the Delta. An at the money call option has a Delta of 0.5; i.e., 50%, meaning a 50% chance of expiring in the money. A deep in the money call will have a Delta of near 1, or 100%, meaning a near 100% chance of expiration in the money. A very out-of-the-money call option will have a Delta of close to zero, meaning a near zero chance of expiring in the money.

The Role of a Cta, Commodity Trading Advisor

admin — Thu, 21 Jan 2010 21:42:06 +0000

Commodity Trading Advisor, Genuine Trading Solutions, a registered CTA with the CFTC, says the role today of a CTA is constantly evolving.

Dwayne Strocen, President of Genuine Trading Solutions says once upon a time a Commodity Trading Advisor was content to be known as a Portfolio Manager trading commodities and futures for a managed futures fund. There is no question today’s investor has become more sophisticated. In response, today’s selection of investment products has become ever more complex and varied, the need for the CTA to understand the uses and management of these products becomes even more acute.

So what exactly is the role of today’s Commodity Trading Advisor. Certainly trading of derivative products for a managed futures fund continues to be as important as before. A CTA has also become more involved with derivative analytics. This role is essentially focused upon becoming an analyst to structure and analyze the more multi-faceted requirements demanded by hedge funds, pension funds and structured products.

The use of derivative analytics to manage the adverse risk of an equity or bond portfolio brought about by adverse market conditions is critical in preserving asset growth. The uses of hedging to prevent volatility has long been understood by the largest institutions but is now available to the smaller sized company and to the individual investor. No doubt as products continue to evolve so too will the CTA evolve to meet the need of today’s professional money manager.

Derivative products are no longer limited to exchange traded commodities futures and options. There continues to be an ever expanding list of over-the-counter derivative products. These are SWAPS. SWAPS and privately transacted products transacted without the use of a recognized exchange. The difficulty is the buyer and seller must find each other to undertake such an arrangement, not always easy. The second problem is no liquidity. There is no one to sell this too should one of the parties wish to terminate the transaction prior to the agreed upon date.

A Commodity Trading Advisor’s role is no longer sufficient to be limited to trading. It is now imperative to understand the industry in a new light so to understand the changing investment environment. Analysis now becomes the catalyst to include a value added service to retain customers. This includes structured products, risk management and OTC derivatives. Continuing education has been and continues to be the hallmark of the best in the industry.

Commodity Options: Trading and Hedging Volatility in the World’s Most Lucrative Market (Hardcover)

admin — Fri, 08 Jan 2010 21:23:24 +0000

Don’t Miss out on Today’s Hottest Trading Arena: Commodity Options! “The authors have written the definitive work on trading commodity options. Their in-depth knowledge of this subject is legendary among industry professionals and expert traders alike, and their ability to relay their knowledge through text, pictures, and the spoken word is unparalleled in our industry.” –Lan Turner, CEO, Gecko Software, Inc. “This book captures the realities of commodity option trading in a simple and easy- to-read presentation that will be beneficial for traders of all sizes and skill levels.” –Chris Jarvis, CFA, CMT, Caprock Risk Management, LLC “Even the most experienced investors often overlook the fact that options on futures are fundamentally different from options on stocks. This book fills that gap and sets the record straight with clear and concise descriptions that are easy to understand. Guaranteed to become a true source of value creation for anyone interested in tradin (more…)

The 10 Keys to Successful Stock Options Trading Key #6

admin — Mon, 21 Dec 2009 12:28:59 +0000

Welcome again to the 10 keys of how to trade stock options successfully. Previously we have discussed the technicalities of options trading. This week I will start looking at the more esoteric aspects of trading beginning with how to formulate a trading plan.

It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didnt stick to. A sound trading plan includes, but is not limited to, the following items:

1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time.

It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. More on money management will be covered in week eight.

2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade.

You should figure out if you like technical analysis, fundamental anlysis or a combination of both. How big will your watch list be? What price range of stocks will you trade? Do you like trading in the money or out of the money options? What Greeks will you consider?

3. Entry and exit rules, i.e. What will make you enter and exit a trade, what length of time will you stay in the trade and how often will you trade.

Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Attempting to go for that little bit extra can lead to a big loss, all the more difficult to take if you had already met your profit target!

4. Your own strategy rules, i.e. which trading strategies you will use primarily and which strategies suit your risk profile.

Know thyself as the ancient Greek saying goes is critical when formulating a stock options trading plan. You will tend to trade options and you do anything else in life, for example, if you are cautious by nature you will trade cautiously, if you are impatient in everyday life you will trade impatiently. Therefore consider your unique traits and formulate your plan around them.

Once you have practiced trading options you will discover your own style of trading, and from that you will develop a plan that suits you. Once you have your plan, and you know it works, stick to it through thick and thin. That doesnt mean that a plan cant be changed but you must ensure that you give your plan a chance to work and that you dont change it the first time you take a loss.

Once you formulate and implement a good trading plan you will be well on your to trading stock options successfully. Next week we will discuss trading with the overall market and index options.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

The Joy of Options

admin — Sun, 20 Dec 2009 21:22:59 +0000

Owning stock has only two, maybe three, possibilities. The stock goes up. Or the stock goes down. Or, as a third possibility, it does a little of both. If you buy a stock, all you want it to do is go up.
If you sell a stock short or close a position (or consider buying it and then decide not to , all you want it to do is go down. I call this one-dimensional trading. You’re long, you’re short, or you’re flat. Your gains and losses travel up and down the number line you may remember from elementary school in lock step with the movement of the stock. Not only that, but it takes a big move to make a big profit. And a big move against you can mean a big loss. Potentially all the way down to zero.
You need to add a second dimension to your trading. You need more choices than picking a direction and hoping you are right. You need to limit your losses, improve your returns, and increase your flexibility. You need options.
For many people, options are something to avoid, being dangerous, complex, and scary. I would like to introduce you to the joy of options. Any time you think you want to buy a stock, I’d like to get you in the habit of first looking at how you could do more with less using options.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price.
An important distinction to always keep in mind: Buying an option gives you rights. Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
We have barely scratched the surface. I say that not to intimidate you, but to make you realize that you only have enough knowledge to be dangerous to yourself. Please do not think that you are ready to go out and buy calls or place spread trades. You are not. You don’t know how an option moves relative to moves in the price of the underlying. You don’t know what time does to the value of an option. You don’t know what volatility is or how it plays into option prices. You don’t know the types of spreads or what they are used for.
Please, please get yourself better educated before you start putting money into option trades. Resist the temptation to buy some cheap options, just to try it out. This is expensive education. There are plenty of advantages to trading options, but it’s still a ruthless market, happy to take your money, your wallet, and your hand if you give it an opportunity. Learn the rules of the game before you put money on the line.
Trading options can be satisfying, rewarding, stimulating, and fun. I invite you to add another dimension to your trading by including options to your repertoire.

The 10 Keys to Successful Stock Options Trading

admin — Thu, 10 Dec 2009 09:35:50 +0000

Welcome back, this week in part four of my ten part series on how to successfully trade stock options I will discuss how to enter the trade at the right. Obviously this is one of the most important aspects of trading, no matter if you are trading stocks, options or any other financial instrument.

This, however, is easier said than done! When entering a trade if you get in too early you may lose some time value of your option. If you get in too late you may miss out on a move in the stock you are trading the options on. The best way to time your entry point is to use good technical analysis. Technical analysis is the technique of reading and analyzing stock charts. Institutional investors are investing millions and millions of dollars in the stock market every day. However they are still human and because it takes a long time for them move that much money predictable patterns emerge in the stock charts. From those patterns future price moves in the stock can be predicted.

Technical analysis is a mix between an art and a science and can be quite complicated. Although the patterns are predictable, of course the stock does not always follow the pattern it should so it is important to use other indicators in conjunction with technical analysis, such as fundamental analysis (discussed in the last article), company news and political and economic events. Because of the complexity of technical analysis I will not go into the how it is performed, there are several good books that I would recommend you read that do that:

“Technical Analysis and the Financial Markets” by John Murphy.

“Getting Started in Technical analysis” by Jack Schwager.

“Technical Analysis: The Complete Resource for Financial Market Technicians” by Charles Kirkpatrick II.

Some of the main technical indicators in charts to watch for are the support and resistance levels, breakouts on volume, moving average crossovers and oversold/overbought conditions. Using and understanding technical analysis is a key component to entering the trade. Next week I will discuss the next step which is, quite aptly, how to decide when to exit the trade.

Option Trading: Thinking “Outside the Box”

admin — Mon, 07 Dec 2009 20:43:04 +0000

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

1930s Volatility is Here

admin — Fri, 04 Dec 2009 10:19:31 +0000

If you are a long premium options trader, volatility is a necessary element to be successful. If volatility is lacking, time decay (Theta) will make this financial instrument a challenging (or even more challenging) one. These days, volatility is not lacking. In fact, volatility is thriving. For a long premium options trader, there is nothing like having market tailwinds to benefit your options strategy.With a market that has gained 20% since March 9th bottoms and is down over 3% intra-day today (as of time of publish), 2009 has obviously been an extremely volatile year thus far. This year seems to be even more volatile than 2008, which by our calculations, was the highest level of consistent daily volatility in decades. In 2009, there have been a multitude of sessions that have seen stocks rally or fall by a significant percentage. It seems almost commonplace that the Dow Jones Industrial Average is up or down at least one percent.

Volatility can be defined in many ways (i.e. implied volatility, statistical volatility, etc.) – in this analysis we look at volatility by the number of occurrences the Dow Jones Industrial Average rallied or declined by one percent or more on a closing basis in a trading day. More specifically, we looked at the absolute return for the Dow Jones Industrial Average for each day going back to 1928. We then calculated the number of occurrences (and the percentage) that the Dow Jones Industrial Average finished up or down more than one percent in a given year.

Below is a graph of the percentage of days out of each year that saw a market move of one percent or more. Two items that stand out are (1) the increase in volatility has soared since 2006 (from 10% to 64%) and (2) the current level of volatility only rivals the early 1930’s when volatility peaked at 74%.